Banks face exposure issues on Glencore-Xstrata merger

LONDON (Reuters) - Glencore and Xstrata may have to put in place new multibillion dollar loans if their proposed $90 billion (56 billion pound) merger goes ahead, to help banks manage their huge exposures to the mammoth company, banking sources said on Tuesday.

The two companies are some of the biggest borrowers of syndicated loans globally. Banks have already lent billions of dollars to them and a combined group would blow through lending limits.

“The combined company would have to do something with its loans. We have $1 billion out to both companies which we would have to reduce to $1 billion to stay within ratings limits,” a senior banker said.

Glencore’s 34.4 percent ownership of Xstrata may avoid triggering change-of-control provisions which would normally force a loan renegotiation.

But while the companies do not have to raise fresh debt to fund the merger, they are likely to have to recast their existing loans for the sake of their lenders.

Banks are restricted in the amount of exposure they can have to individual companies, sectors, countries and regions to help avoid concentration risk.

Glencore is rated BBB and Baa2 while Xstrata is rated BBB+ and Baa2 by Standard & Poor’s and Moody’s, which could further limit banks’ exposure, although lenders may be able to make temporary exceptions.


“Banks would be willing to waive single-name concentration risk for a while and work it out with the company,” a banker said.

Both companies are listed in the UK and may also have to show the UK regulator certainty of funds for the merger, banking sources said.

Banks are talking to the companies and have indicated they are available when plans are clearer. A financing of $8 billion or more could emerge by May, two bankers said.

Citigroup and Morgan Stanley are advising Glencore. Deutsche Bank, JP Morgan, Goldman Sachs and Nomura are advising Xstrata.

Glencore signed a $11.875 billion loan refinancing in May 2011, which consisted of a $3.54 billion, 364-day revolving credit and a one-year extension to an existing $8.34 billion, three-year loan. The company has net debt of $12.9 billion.

Xstrata, which has net debt of $8.1 billion, agreed a new, five-year $6 billion syndicated loan in September 2011 which included two one-year extension options.

Banks with exposure to both deals include ANZ Banking Group, Banco Santander, Barclays Bank, BBVA, Citigroup, Commerzbank, Commonwealth Bank of Australia, Credit Agricole CIB, Deutsche Bank, HSBC, JP Morgan, Lloyds TSB Bank, Mizuho Bank, National Australia Bank, Royal Bank of Canada, Royal Bank of Scotland, Standard Chartered, Toronto Dominion Bank and Westpac.

The companies may also have bilateral facilities, which may further bump up some banks’ exposure.

Editing by David Holmes